MicroStrategyShort
The Case for a 76% drop on MSTR: Norms of fib levels in a trend.
If you draw a fib from the high to the low of the 2022 drop in MSTR, you'll see we have now completed all of the fibs of this swing.
In this post we're going to take a detailed look at two things;
1 - How a trend typically forms heading into a 4.23 extension.
2 - What typically happens at 4.23 extensions.
Everything we cover here will be generic rules for trend development. It's equally valid on bull and bear moves (we'll use examples of both) and it can be used on any timeframe. We're going to stick to big charts for this but these same concepts also scale down to day trading.
We are going to look at these specific hypothesis';
These conditions in MSTR are marked into the chart pic. Let me show you another example on a bear trend to get us started.
This was the last bull swing before the 2007-2008 reversal. We're using the topping swing for our fib. We can draw this really early as soon as we see the first possible break.
We drop to the 1.61 and then we bounce. It looks like a recovery in real time.
Then once the 1.61 is broken we drop quickly to the 2.20.
Look closely here. The move to the 2.20 isn't the big red candle. There's a wick. That tells us this was a flash event. Crashed to the support, rapid bear trap. Filling our conditions of the expectations of a 1.61 break and the reaction 2.20.
The wick candle pullback went to around 1.61 and then there was capitulation when the 2.61 was broken.
We get to the the Final Boss of the fibs. The 4.23. There's a head fake under it and then a recovery back over it.
And the 2008 crash is over.
Want another one? Here's BB. The pattern expressed over a very long time. Full booms and bust.
Saw a lot of these patterns in 2021.
Imagine if you could have used the same playbook we can observe on the all time BB chart and used the same set of rules to understand all the key parts of the 2021 trend. That'd be weird.
Attached is a pic of the real time 2021 mention of fading the BB rally at the 4.23 (just to show this isn't just perfect fitting after the fact).
Let's jump back to another low. Here was the BTC low.
Or a bull one.
What Happens at 4.23 Fibs?
Most of the time when 4.23 fibs are hit there is a large correction or a full blown reversal. Cases of 4.23's breaking without retesting the 1.61 - 1.27 (and that's a crash, big move) are rarer.
In the times there is a 4.23 breakout, the following trend is usually exceptional. When looking at big instances of failed 4.23s they're usually found around the middle of a bubble or crash (depending on if it's a bull or bear break). It's much more difficult to show examples of the failed ones without being able to zoom in and out a lot, but you can look for them in places like the Nasdaq bubble, NVDA rally and in failure points of uptrends heading into crashes.
Almost invariably, the trend goes into a state of hyper performance if the 4.23 is broken.
However, if it is not broken - then we're usually going to ultimately end up spiking out the 1.27 fib. Which round trips most of the move.
If MSTR is a 4.23 blow off, it's give up most of the gains of the recent rally. That is inside of the bullish perspective. The correction comes to 1.27. If 1.27 fails, then you can end up with that lifetime BB chart.
Action around the 4.23 itself is fraught with caveats when it comes to actionable trading. You have to always have the assumption that if you're wrong you're going to be betting against a punishing trend and you have to be risk cautious and quick to get out / plan new levels. It always has to be remembered if wrong, the fade will fail spectacularly.
Further complicating things is we really can't be sure what sort of 4.23 head fake we're going to get. There are times we reverse right at the 4.23. Or come up a bit shy of it. Other times we make a nominal head fake that you could have started betting against almost as soon as it got passed the level and it went nothing but well for you.
Then there are the super blow offs. BB was somewhere in the range of 20 - 25% blow off. I remember this well (I'd shorted the 4.23 touch) it only lasted an exceptionally brief amount of time and was ultimately the Mother of all wicks but if I'd be fully exposed to all that price move - wouldn't have mattered. I'd probably have got nailed before it.
When it comes to the actual tactical betting on a 4.23 reversal, it's tricky. The core underlying theory of the 4.23 decision is a simple binary one though. Usually when the 4.23 is hit we're going to head into hyper trend conditions. These can be higher (and this is hard to quantify targets for with fibs) or they can be crashes (which we can usually roadmap with the 1.61 - 2.20 - 4.23 thing).
Extremely polarizing level here. Either all fib bases bear cases are entirely annulled for the foreseeable future or a drop of about 75% is setting up.
The 4.23 pullback/reversal is the far more common outcome.
====
Bonus doom posting:
In this post we're going to take a detailed look at two things;
1 - How a trend typically forms heading into a 4.23 extension.
2 - What typically happens at 4.23 extensions.
Everything we cover here will be generic rules for trend development. It's equally valid on bull and bear moves (we'll use examples of both) and it can be used on any timeframe. We're going to stick to big charts for this but these same concepts also scale down to day trading.
We are going to look at these specific hypothesis';
- 1.27 - 1.61 will produce some sort of pullback.
- The breaking of 1.61 will produce a steady trend to at least 2.20.
- Around 2.20 - 2.61 there will be some sort of reaction.
- The move from 2.61 to 4.23 is very strong.
- 4.23s can mark the end of major moves.
These conditions in MSTR are marked into the chart pic. Let me show you another example on a bear trend to get us started.
This was the last bull swing before the 2007-2008 reversal. We're using the topping swing for our fib. We can draw this really early as soon as we see the first possible break.
We drop to the 1.61 and then we bounce. It looks like a recovery in real time.
Then once the 1.61 is broken we drop quickly to the 2.20.
Look closely here. The move to the 2.20 isn't the big red candle. There's a wick. That tells us this was a flash event. Crashed to the support, rapid bear trap. Filling our conditions of the expectations of a 1.61 break and the reaction 2.20.
The wick candle pullback went to around 1.61 and then there was capitulation when the 2.61 was broken.
We get to the the Final Boss of the fibs. The 4.23. There's a head fake under it and then a recovery back over it.
And the 2008 crash is over.
Want another one? Here's BB. The pattern expressed over a very long time. Full booms and bust.
Saw a lot of these patterns in 2021.
Imagine if you could have used the same playbook we can observe on the all time BB chart and used the same set of rules to understand all the key parts of the 2021 trend. That'd be weird.
Attached is a pic of the real time 2021 mention of fading the BB rally at the 4.23 (just to show this isn't just perfect fitting after the fact).
Let's jump back to another low. Here was the BTC low.
Or a bull one.
What Happens at 4.23 Fibs?
Most of the time when 4.23 fibs are hit there is a large correction or a full blown reversal. Cases of 4.23's breaking without retesting the 1.61 - 1.27 (and that's a crash, big move) are rarer.
In the times there is a 4.23 breakout, the following trend is usually exceptional. When looking at big instances of failed 4.23s they're usually found around the middle of a bubble or crash (depending on if it's a bull or bear break). It's much more difficult to show examples of the failed ones without being able to zoom in and out a lot, but you can look for them in places like the Nasdaq bubble, NVDA rally and in failure points of uptrends heading into crashes.
Almost invariably, the trend goes into a state of hyper performance if the 4.23 is broken.
However, if it is not broken - then we're usually going to ultimately end up spiking out the 1.27 fib. Which round trips most of the move.
If MSTR is a 4.23 blow off, it's give up most of the gains of the recent rally. That is inside of the bullish perspective. The correction comes to 1.27. If 1.27 fails, then you can end up with that lifetime BB chart.
Action around the 4.23 itself is fraught with caveats when it comes to actionable trading. You have to always have the assumption that if you're wrong you're going to be betting against a punishing trend and you have to be risk cautious and quick to get out / plan new levels. It always has to be remembered if wrong, the fade will fail spectacularly.
Further complicating things is we really can't be sure what sort of 4.23 head fake we're going to get. There are times we reverse right at the 4.23. Or come up a bit shy of it. Other times we make a nominal head fake that you could have started betting against almost as soon as it got passed the level and it went nothing but well for you.
Then there are the super blow offs. BB was somewhere in the range of 20 - 25% blow off. I remember this well (I'd shorted the 4.23 touch) it only lasted an exceptionally brief amount of time and was ultimately the Mother of all wicks but if I'd be fully exposed to all that price move - wouldn't have mattered. I'd probably have got nailed before it.
When it comes to the actual tactical betting on a 4.23 reversal, it's tricky. The core underlying theory of the 4.23 decision is a simple binary one though. Usually when the 4.23 is hit we're going to head into hyper trend conditions. These can be higher (and this is hard to quantify targets for with fibs) or they can be crashes (which we can usually roadmap with the 1.61 - 2.20 - 4.23 thing).
Extremely polarizing level here. Either all fib bases bear cases are entirely annulled for the foreseeable future or a drop of about 75% is setting up.
The 4.23 pullback/reversal is the far more common outcome.
====
Bonus doom posting:
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